A jittery end to the first trading quarter of 2018

Global markets as represented by the MSCI World Index managed to recover some of the losses after several markets, like the major US stock indices made huge corrections on Friday, March 23, 2018, then came up high on Monday, March 26, 2018. For example, the S&P 500 index closed at 2,658.55 after hitting the lows of close to 2,586.34 on the 200-day moving average (MA) level. The move is about a 2.8 per cent recovery.

Source: Stockcharts.com (One-year daily chart of S&P 500 Index, March 27, 2018)

Moreover, the 14-day relative strength indicator (RSI) is also showing some recovery of hitting the ‘Oversold’ region of 30. The RSI stood at 42.59 on Monday, March 26, 2018.

Similarly, the local Straits Times Index (STI) also gained some lost ground on Tuesday, March 27, 2018 when it closed up 26.89 points to end the trading session at 3,439.35. This bring the year-to-date (YTD) returns to 1.07 per cent.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), March 27, 2018)

Looking at the one-year daily charts, we noticed that the index was on track to hit its lows of close to 3,377.24 back in early February (February 09, 2018), but managed to rebound back to end Tuesday session off the closing lows on Monday, March 26. We do not think that the rebound is anything significant as the market volume traded is 1.23 billion shares worth S$1.24 billion as compared to Monday’s trading volume of 1.37 billion shares worth S$1.36 billion. We think that it was a weak rebound from the lows, and we expect to see more of such roller coaster style of moves in the next few months.

What is inhibiting the markets continuing ascent

If you ask anybody what the exact causes for the change in investor attitudes towards the financial markets is/are, the answer might be no one knows. However, one of the top most concerns is valuations. Here we have the major US stock indices trading at all-time highs for the past eight to ten years since the end of the Global Financial Crisis (GFC), but investors seemed to be unfazed by the sky-high valuation multiples until February 2018 when we saw the first significant correction of the financial markets.

Below illustrates the forward S&P price-to-earnings (P/E) multiples which have been trending up since 2012.:

Source: Phillip Securities Research

We are also seeing similar story played out in the global markets outside of the US as depicted by the MSCI World (ex-USA) Index as shown in the chart below:

Source: Stockcharts.com (One-year weekly chart of the MSCI World (ex-USA) Index, March 29 2018)

We noted from the chart above depicting the one-year weekly chart of the MSCI World Index (ex-USA) that global markets ex-USA are not spared from the global sell off and has declined from a peak of 2,150 to 1,998.26 which is also close to the 50-day moving average (MA) line.

Moreover, based on the 14-day relative strength index (RSI), the index has fallen from the ‘Overbought’ levels of above 70 to a middle range of 47 to 48 points levels. This could suggest that investors are now starting to take a step back and analyse the implications from the latest so-called tariff wars.

Another reason might be the low and stable volatility levels we have experienced for many years as illustrated by the Volatility or VIX index. For the past few years, volatility has remained mild, and has not breached beyond the 15 level. At the height of the GFC, the index spiked to a high of 80s, but post GFC, the VIX index hovered around 10 to 11 levels.

However, during the month of February 2018, the VIX index spiked close to 50 before coming back down significantly. With the second round of heightened tariff tensions, the VIX index came back up to about 23 -25 levels. This is an example of taking the decade old complacencies out of investors’ minds, and causing them to take actions through the massive selloffs seen recently.

Source: Stockcharts.com (One-year daily chart of the Volatility (VIX) Index, March 29, 2018)

As depicted by the one-year daily chart of the Volatility (VIX) index, the overall trends as shown by the 50-day MA and 100-day MA are upward sloping. This could mean that there are heightened tensions among investors seeking to cash out of the stock markets, and perhaps shift their investments to traditional safe havens like gold, US Treasuries and Japanese Yen.

Gold prices soared as trade tensions mount

Source: Stockcharts.com (One-year daily chart of CME Spot Gold Price Index, March 29, 2018)

We noted that even with a slight decline from the peak of US$1,360/oz of gold to the current spot price of US$1,327.30/oz as of March 29, 2018, gold prices in general are still trending up.

If we were to look at the early February 2018 time period shown in the gold price chart above, the prices have also peaked at around US$1,360/oz. We will not be surprised that gold prices could make another attempt to hit the same level or even higher than US$1,360/oz given the current weakened US Dollar environment, along with heighted volatility, trade tensions, and a higher inflationary environment.

US Treasures seen as beneficiaries of capital flight

Source: Stockcharts.com (One-year weekly chart of US 10-year Treasury Yield Index, March 29, 2018)

As shown in the chart, there is an upward trend shown for the US 10-year Treasury Yield Index. Since the US Federal Reserve hiked interest rates by another 25 basis points (bps) on March 21, 2018, and signalled three rate hikes in 2018, the long-end of the yield curve which is depicted by the US 10-year Treasury Yields continued to rise, but recently, was shown to have slowed down its rate of ascent as seen on the extreme right-end of the weekly chart.

With this, we decided to cross check the US Treasury Yield Curve, and there appears to be a flattening of the curve (shown by the pink line) as of March 30, 2018 as compared a year ago (shown by the yellow line).

Source: Bondsupermart.com (US Treasury Yield Curve, March 30, 2018)

We are also cautious when the short-end of the yield curve starts to rise till the point that the curve goes into an inverted shape. When this happens, it is usually not a good sign for equity markets as long-term interest rates could tilt lower, and investors could shift their fund flows out of equity instruments into safer, higher quality short-term debt like the US Treasury bills, or other high quality short-term corporate credit instruments.

Japanese Yen is still seen as safe haven currency

Source: Stockcharts.com (One-year daily chart of the USD/JPY exchange rate, March 29, 2018)

As depicted in the one-year daily USD/JPY chart, we noted that there is an overall trend of a declining US Dollar currency as compared to the Japanese Yen currency. Although a recovery was seen close to the end of March 2018, it appeared to be a ‘false alarm’ as the US Dollar starts to drop.

One of reasons for the continuous dips in the US Dollar exchange rate could be the rising debt levels both on the fiscal side, and the uncertainties over tariff wars. However, this week as trade tensions are starting to simmer with US and China willing to strike a compromise, the selling of the US Dollar has eased as shown in the extreme right-hand side of the chart.

Source: Stockcharts.com (One-year daily chart of the Dollar Index (DXY), March 30, 2018)

How should investors manage all these information

It appears quite confusing with so many factors impacting the global markets. However, it is good to take a step back, and try to narrow a few data points in order to pinpoint which factors impact the most as to the sustainability of the major global stock indices.

Depending on your comfort level, you may decide to follow the direction of the US Dollar Index, Personal Consumption Expenditures (PCE), and the monthly job numbers. These pieces pf data are also closely followed by the US Federal Reserve as they plan their monetary policy-making.

How did the Straits Times Index ended for the week and quarter

With the passing of the first trading quarter of 2018, the local Straits Times Index (STI) ended flat at around 3,427.97. However, looking at the broader markets, many so-called ‘blue-chip’ counters have taken beating, including the likes of Singtel whose stock price fell 6.4 per cent since the start of the year. The counter closed Thursday, March 29 trading session at 3.37, up 3 cents intraday, or 0.898 per cent.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of Singtel stock price, March 29, 2018)

As we start afresh in the second trading quarter next Monday, April 02, investors would hope to see better performances especially with the earnings reporting season kickstarting in April and May, followed by the Annual General Meeting (AGM) season with most companies holding their annual gatherings with shareholders, thus providing more clarity for the year. We shall cross our fingers and hope for a good second quarter and beyond.

How did our model stock investment portfolio perform

Note: Model equity portfolio performance as of March 29, 2018. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 85.22 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 18 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic (up 44.7 per cent since end June 2017); followed by Ascendas Reit (up 11.9 per cent since November 2016), and SATS Ltd (up 6.7 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 10.8 per cent since December 2016); followed by Straits Trading (down 8.2 per cent since end June 2017), and Sheng Siong (6 .1 per cent since end June 2017).

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of June 2018.

Upcoming Earnings News next week

SPH Reit will kickoff the start of the quarter-end reporting on April 06, Friday.

Major economy reports to look out for next week


Source: Tradingeconomics.com

Some of the key local economic data releases out next week include the URA and HDB flash property index figures for 1Q, the Purchasing Managers’ Index (PMI), the Monetary Authority of Singapore (MAS) semi-annual policy meetings, and the Gross Domestic Product (GDP) figures for 1Q. A major highlight will be MAS decision on the Singapore Dollar policy.


Source: Tradingeconomics.com

We have gotten a first-hand look at China’s official PMI data on Saturday, March 31 which beat expectations. All eyes will be on Monday’s release of the private sector PMI data.

United States

It will be a week of job figures on tap for the US economic data releases with the private sector ADP Employment report scheduled for release on Wednesday, April 04, where the consensus number calls for a rise of 205,000 private sector jobs. The official non-farm payrolls data will be released on Friday, April 06 where a consensus figure of 198,000 jobs is expected as compared to the February record of 300,000 jobs. The unemployment rate is expected to remain unchanged at 4.1 per cent.

In the meantime, have a good start to a brand new second quarter 2018 ahead.

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About Peak Hour 87 Articles
I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.